We consistently have individuals inquiring how we are certain there is a stock market crash around the corner. More specifically they ask us when we think it’s going to happen. We typically make the mistake of getting wide eyed and explaining too much financial jargon which ultimately ends the conversation before it gets started, but today we are going to explain it in the simplest way we know how.
Story Of The Turkey
From the day a turkey is born he is fed every day. Every single feeding confirms the turkey’s belief he will be fed by a strange human. This turkey can be fed for months or even years, but on the afternoon of the Wednesday before Thanksgiving, something unexpected will happen to the turkey. Something that will throw a wrench into its entire belief system resulting in tragic consequences for him. But where did the turkey go wrong?
The turkey learned from observation which is generally what humans do, right? Its confidence increased as the number of friendly feedings grew, and it felt increasingly safe even though the slaughter was more and more imminent. Consider this, the feeling of safety reached its maximum when the risk was at the highest!
How does this relate to the stock market? It’s quite simple, as the market marches higher and higher and everyone around the water cooler or the break room is making money we are getting lulled into a false sense of security. Nothing goes up in price forever, it is inevitable that the market will correct or crash at some point in time. We always question the market and look for weaknesses/threats and let our system keep us fully invested until its time to exit the market.
In 1997 Amazon emerged as an online bookstore with the purpose of housing every available book possible while eliminating brick and mortar costs. The concept was a new one but instantly took off as they could offer significantly lower prices to consumer due to warehousing books instead of operating large chain box stores. Slowly but surely their business model started to include other products such as cds, dvds, electronics, etc all under the same premise.
From 1997-2000 the stock grew tremendously an astounding, 10900%
That wasn’t a typo! This an investor’s dream investment, but unfortunately Amazon would end up being one of the worst losers in the dot com bubble crash.
From 2000-2002, Amazon would lose 93% of it’s value.
Netflix has forever revolutionized the viewing of cinematic movies in the American household. The company started with one simple goal in mind, to provide a no late fee subscription model for renting home movies. Netflix capitalized on the new DVD technology early on while big box retailers such as Blockbuster were still renting out VHS tapes. Operating solely in DVD rentals Netflix was able to develop a business model which consisted of two main components, dvds and the United States Postal Service.
The rest of the story is history! Fast forward a decade and Netflix is streaming directly to almost 30 million homes.
During its meteoric rise beginning in 2005, Netflix saw its stock rise 2150% For almost 7 straight years Netflix saw nothing but positive gains with the exception of a couple pull backs. But in 2011 shareholders stared in disbelief as they saw Netflix plummet 77% from top to bottom.
As our society advances so does our technology and 3D printing has been at the forefront. 3D printing is changing the way we produce objects, from tools and toys, to clothing and even body parts. Recently, giant 3D printers in China were able to produce 10 houses in just one day at a cost of less than $5,000 per house.
3D Systems was once held in high regard in the 3D printing sector, however as the novelty wore off and investors saw the business side of the their company they were not impressed.
Nonetheless investors flocked towards the stock shooting the price up 3900% in 5 years. The next big advancement of our generation was here and investors were convinced they “got in on the ground floor.” Sadly, investors eventually saw the stock fall 93% erasing almost all of the previous gains.
Moral Of The Story
It is vital you remember and recognize the turkey felt the safest when it was ultimately in the most danger. The same holds true for the stock market. Investors generally become extremely complacent when stocks are soaring, this complacency always leads to disaster. It may not be right away, in fact nobody knows for certain when it will happen, but make no mistake it will happen.
Here’s to our wealth!